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Cape Town - Of the 19.5 million credit active consumers in South Africa, 12 million have missed at least one debt instalment, according to an industry expert.

Even more concerning, 9 million - or 46.4% - have impaired credit records as a result of missing three or more instalments, says Clark Gardner, founder and CEO at Summit Financial Partners.

The biggest culprit when consumers fall into the debt trap is their use of debt to service other debt. Former Reserve Bank governor Tito Mboweni warned as far back as six years ago about the "credit madness", where consumers were offered up to three credit cards from banks and told "they could use the one to pay off the other".

Gardner says about 55% of credit active consumers in South Africa spend more than they earn.

"Consumers typically fall into a debt spiral when they access increasingly more debt merely to make ends meet and pay other existing debt. This is what we call 'borrowing from Peter to pay Paul', and results in the average consumer accumulating up to 11 accounts.

"How consumers react the first time they cannot afford a debt instalment is critical," says Gardner. He shares his top three tips to avoid the debt trap:

1. Spend less than you earn

Any financial planning advice should always start with looking at how you spend your money and whether you have a cash surplus or a cash shortage at the end of the month.

Understanding your spending habits by measuring your spend over a number of months is the first, and most effective, financial habit any consumer should adopt.

• Measure your spend

If you are not measuring, then you are not aware if you are spending less or more than you earn. Understanding whether you are spending on necessities or luxuries is critical for effectively managing your cash flow.

This will also provide an early indicator of bigger problems like excessive life style costs that may need immediate, corrective action.

Seeing your spending patterns in black and white will improve your discipline and prevent impulse purchases by illustrating the consequences of not sticking to your budget.

When you understand that buying those shoes will mean you don't have enough money for the month's groceries, you will be more likely to think twice.

• Set household financial goals

If everyone in your household understands the end goal, they will know why they need to stay disciplined and make sacrifices. Goals provide a sense of financial purpose which will improve discipline and ensure buy-in from all household members.

• Change your consumer norms

Most consumers buy their vehicles on credit and like to buy brand new models that will impress their friends and colleagues.

What they fail to realise is that when you buy a new vehicle, you lose at least 15% of its value on day one, not to mention that you will be paying over 10% for finance costs in the first year alone.

How impressive is a fancy vehicle when you realise you have lost 25% of its value in the first 12 months - and it is still owned by the bank?

"Our interventions are aimed at challenging the current thinking in society, making it more 'cool' to resist your ego and spend less than you earn," says Gardner.

2. Correct your past mistakes

Where you have a negative monthly cash flow, it is usually due to excessive debt instalments. Make sure you address this affordability problem early and effectively.

Accessing more loans to try and cover the shortfall will merely delay the crash and multiply the problem.

If you are struggling to pay your debt instalments, you can contact your credit providers and make payment arrangements, like paying reduced instalments for three to four months.

This will allow you to catch your breath. Trying to hide the problem by making more debt will inevitably lead to a dead end (usually after about 10 accounts) which will require far more drastic action like debt counselling, which can take up to five years to bring you back to financial health.

The sooner you address your negative cash flow, the quicker and easier it will be to correct. Do not ignore letters of demand or default notices, as they will not go away and you will merely accumulate expensive legal and collection fees.

3. Have an emergency savings fund

Emergencies are inevitable. To prevent them from wreaking havoc on your finances, build up a savings fund which you can use to pay for emergencies when they happen.

You should aim to have savings equal to two or three times your monthly salary, but start by saving something every month.

Having an emergency savings fund will save you from having to access expensive unsecured debt when urgent, unexpected payments need to be made.

When debt is accessed out of desperation, we usually don't take the time to understand the costs, risks or consequences, resulting in debt that can easily get out of control.

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